Memorandum submitted by the Independent
Pub Confederation
INTRODUCTION AND
OVERVIEW
1. The newly formed Independent Pub Confederation
(IPC) welcomes the opportunity to submit written comments as part
of the above ongoing inquiry. The component members of IPC submitted
evidence to the original inquiry and this short memorandum seeks
to build on, rather than repeat their views. It summarises the
views of our members on the issues identified in the original
Report and the Committee's call for further evidence.
2. The IPC is an umbrella body, bringing
together all representative bodies and campaign groups representing
publicans, consumers and small brewers. Members of the IPC are
the Association of Licensed Multiple Retailers, Guild of Master
Victuallers, the Fair Pint Campaign, the Federation of Small Businesses,
Justice for Licensees, CAMRA, Unite the Union and the Society
of Independent Brewers—supported and endorsed by BII and
FLVA.
3. The original Business and Enterprise
Committee Report published in May 2009 was the culmination
of an exhaustive inquiry process examining all aspects of public
house ownership. It outlined a series of substantive concerns
about the relationship between pubcos and their lessees as well
as a number of key recommendations for legislative and regulatory
intervention in the market in order to address them. These can
be grouped into five key areas—the beer and other product
ties, the rental valuation model, the issuing and management of
leases, dispute resolution and the competitive environment
4. The IPC supports and endorses the Committee's
key findings and recommendations for action. As the voice of the
publican we are uniquely placed to comment on the degree to which
recent industry initiatives and developments—the RICS Report,
the agreement between BBPA, BII and FLVA and the establishment
of PIRRS—adequately address those concerns and recommendations.
5. In responding to this call for additional
evidence we have therefore focused on whether the Committee's
recommendations are still valid, the degrees to which they are
addressed by the recent initiatives and we identify which issues
remain outstanding. We have concluded by identifying the further
steps we believe must be taken to address the Committee's legitimate
concerns about the plight of lessees.
THE INDEPENDENT
PUB CONFEDERATION
6. By way of background, the IPC was established
in October 2009 following the publication of the Business
and Enterprise Select Committee (BESC) Report, the OFT investigation
of the CAMRA Super-complaint and ongoing scrutiny of the sector
by the Government. The IPC provides a strong and unified voice
for the grassroots of the industry and we represent independent
publicans, both singleton and multiple operators.
7. Between them, the national trade bodies
of the IPC represent around 25,000 publicans. Just under
half of these businesses will be operated under lease issued by
a pub company or other industry landlord. Of these, three quarters
will operate with an exclusive purchasing agreement as part of
the terms of the lease.[23]
8. The formation of the IPC is a direct
consequence of the recent industry mediation process, the agenda
for which was the BESC Report of May 2009 and its key recommendations.
It rapidly became clear that the landlord representatives were
unwilling or unable to address all of the matters arising from
the Report. Moreover, the Committee's substantive recommendations
were explicitly excluded from consideration.
9. Whilst all parties to that process were
therefore unable to agree on a complete package of measures to
address the BESC Report and recommendations, the discussions did
demonstrate the very high degree of commonality and accord amongst
lessee groups. The mediation process was therefore a catalyst
for the establishment of a common position and a broad coalition
of support behind it. That culminated in the launch of the IPC
and its manifesto on 14 October, a copy of which is attached.
10. The IPC continues to endorse the conclusions
and key recommendations of the original BESC Report. We believe
action is required in all five areas—the beer tie, the rental
valuation model, the setting and issuing of rents, the machine
tie and the competitive environment. The measures taken recently
by BBPA, BII and RICS are only a partial response to the report
and we therefore do not believe that they are sufficient to justify
a step away from the small number of specific regulatory interventions
BESC recommended.
THE RENTAL
VALUATION MODEL—THE
RICS REPORT
11. In direct response to the criticisms
of the Institution implicit in the BESC Report, the RICS commissioned
an independent Forum, chaired by a senior property lawyer, to
review the rental valuation model and make recommendations for
its refinement. A number of members of the IPC were invited to
give evidence to the Forum over the summer—most notably
Fair Pint and the ALMR—and the report was published in October.
12. The IPC concurs with much of the analysis
put forward by the Forum. The Report is highly critical of the
current situation and seems to concur with the Committee that
the "status quo is not an option". It states that the
current relationship is under "stress", where a lack
of transparency and an imbalance of bargaining power results in
"difficult and adversarial negotiations" and where efforts
to address this are hampered by a lack of "cross industry
cooperation". It notes that if this was a situation involving
consumers, then the case for government intervention would be
overwhelming, and regrets that this is not the case. We support
and applaud this observation.
13. The Forum sets out a series of recommendations—to
be adopted by RICS and others—to address this unacceptable
situation. These are summarised briefly below together with commentary
by IPC:
(a) Principles based approach: the report
rejects the suggestion that there should be an automatic 50/50 share
of the divisible balance between landlord and lessee. It also
states that a correct interpretation of the RICS Trade Valuation
Guidance should see the tied tenant being financially no worse
off than a free of tie tenant. Both of these points were raised
by the lessee groups during the mediation process but they were
rejected out of hand by landlord representatives. The failure
to accept these principles has been a major stumbling block and
remains a matter of concern
(b) Self-Regulation: There should be one
code, not many, and it should be objective, with independent redress
and review. We agree wholeheartedly with this. The lack of independent
redress and sanctions for breaches is a major failing of the current
system of voluntary self-regulation and the weakness of it can
be seen in the fact that the 2008-09 inquiry was necessary despite
the 2004 TISC Report. We have pledged to work with RICS to
develop an independent code.
(c) Transparency: there should be an independent
protocol outlining which items are rentalised and which are excluded,
an explicit statement of how the rent will be calculated and the
treatment of tenants' improvements. There should be minimum standards
of information to be presented for rent reviews. These were all
things asked for by IPC in the mediation process and which are
not adequately delivered in the BBPA's outline agreement; we have,
of course, yet to see the proposed revised BBPA Code.
(d) Operating costs: RICS concurs with
BESC that more information can and should be provided to lessees
on this vital element of the rental calculation. It notes that
the "lack of cross industry cooperation" has hampered
the development of the ALMR Benchmarking Survey—a point
underlined during the mediation negotiations—and undertakes
to work with the Association to expand and refine it.
(e) Guidance: RICS will review is valuation
information paper and the composition of the Trade Related Valuation
Group to redress the perception of bias. The IPC has pledged to
work with RICS on this and will make available experienced and
qualified lessees to sit on the panel and input into the drafting
of guidance.
14. The Forum's report is a welcome recognition
by an independent third party of the problems facing the trade
and an endorsement of the solutions put forward by IPC to resolve
them. Lessee input into the revised guidance and TRVG will be
vital to addressing these matters and we would welcome a commitment
from RICS to work on a collaborative basis with lessee representatives,
not just with landlord representatives as they have in the past.
15. We are somewhat uncertain as to the
actual status of the Report. These recommendations are made by
an independent Forum and it is not at all clear whether the RICS
has agreed to adopt and implement them. We hope that this may
be clarified through the evidence session.
16. Equally, we are unclear about the BBPA
response to RICS. The RICS Report was published the day after
the BBPA's Agreement with the BII and FLVA but the Agreement makes
no reference to any of the RICS conclusions and in particular
the suggestion that industry codes should be abandoned in favour
of an independent Code with external redress. We would be very
willing to work with BBPA and others to present a joint submission
to RICS on the establishment of an independent Code and redress
mechanism.
17. The key question for the IPC in respect
of the RICS Report is whether, when and how its recommendations
will be adopted and implemented.
THE ISSUING
AND MANAGEMENT
OF LEASES
18. Following the failure of the pub industry
mediation process to reach a satisfactory conclusion, the BBPA
announced that it had reached an Agreement with BII and FLVA to
review and revise its Framework Code of Practice on the issuing
of pub leases. The Agreement sets out the principles which will
under-pin a revised Code of Practice but restricts its scope to
the rent setting process. A commentary on the Agreement prepared
by Fair Pint is attached in the Appendices to this submission
(not printed here).
19. The revised Code can therefore only
address one aspect of the concerns raised by BESC; even the BII
and FLVA co-signatories admit that it is not a full and final
solution to satisfy lessee concerns. Crucially, the agreement
contains no detail on how any new Code will be implemented and
enforced. We understand that the revised Code will not be made
available until early next year and not be in place until summer
2010.
20. Even as a partial solution, the Agreement
is inadequate to address the concerns raised by BESC about the
rent setting process. It simply enshrines existing common commercial
practice and relevant law. As such it represents minimum standards
rather than best practice. More importantly, whilst the Agreement—if
fully implemented—will go some way towards providing more
information for new lessees, it will leave the position of existing
ones fundamentally untouched, arguably creating two tiers of lease
practice. There is little meaningful or new, and we submit that
many of the points included—eg clarifying where machine
income sits in the rental model—should have been done following
the 2004 TISC inquiry.
21. For example, the new proposal to improve
transparency through the publication of a shadow profit and loss
account was originally proposed by lessees and is simply disclosure
of a document which the landlord already has in his possession.
We argued for a far higher level of disclosure to meet standard
accounting principles and practice. We also suggested that there
be some obligation on the landlord to justify the assumptions
of turnover and costs used. The absence of these reassuring checks
and balances remains a matter of concern and renders the "concession"
meaningless.
22. A more detailed commentary on the proposed
Agreement has been produced by the Fair Pint campaign and is attached
at Appendix 2 (not printed here).
23. The IPC's biggest area of concern about
the BBPA Framework Agreement remains that any Code issuing as
a result of it will remain entirely voluntary and unenforceable.
We entirely concur with the RICS's analysis of the inadequacies
of voluntary self-regulation in the sector and the need for a
single Code of Practice, independently established, monitored
and enforced with a separate mechanism for redress. We note that
this model exists in the domestic property sector and that the
RICS has established a Property Standards Board to afford consumers
access to independent redress. This model applies to Home Information
Pack Providers, Estate Agents, Property Search Agents etc and
we believe the same protection and redress should be afforded
to tenants and lessees in the pub sector.
24. The BBPA Code makes no provision for
independent scrutiny and there are no effective sanctions defined.
Detailed implementation of the Code's provisions is left to the
member companies' discretion and the revision will leave that
largely untouched. The adoption of the revised Code will still
leave pub companies free to change their individual Code of Practice
at a whim, without consultation, or to ignore it altogether. The
decision by Greene King to resign its membership of the BBPA shows
that the Code is now meaningless as there is no requirement on
them to adopt or implement it.
25. The BBPA admitted in the Morning Advertiser
of 5 November that there will be no sanctions for companies
who choose to ignore or pay lip service to the revised Code. A
breach of the Code can only be dealt with by expulsion from the
BBPA or removal of BII accreditation. Neither of these sanctions
will have sufficient commercial impact to act as a check on company
behaviour. Moreover, the BII is far from an independent redress
mechanism.
26. The Code will have no legal status and
enforceability unless it becomes part and parcel of the relevant
lease. Landlord representatives have refused outright to accept
this principle, but if pub company behaviour is to be truly regulated
by means of an industry Code of Practice, then the IPC believes
it to be imperative that such a Code is enshrined in the lease.
27. For the IPC, the key outstanding question
in relation to the BBPA Code is not whether the elements are sufficient
but whether they will actually be delivered. Can voluntary self-regulation
be trusted and can it work? We would have more confidence in this
if the TISC Report had not recommended urgent, more effective
regulation in 2004. Then, the Committee recommended that the Government
should impose a statutory code on the industry "if it did
not show signs of accepting and complying with an adequate voluntary
code". The pubcos promised in 2004 that they would deliver
but the continued weakness of the BBPA proposals in this regard
suggest that this recommendation has yet to be recognised and
adopted.
DISPUTE RESOLUTION—PIRRS
28. The 2004 TISC and 2009 BESC
Reports both expressed concern about the lack of a low cost dispute
resolution system. Since the inquiry, much work has been done
to pilot a new scheme run by the BII. The Pubs Independent Rent
Review Scheme (PIRRS) is in the process of being established and
aims to provide a fixed-cost professional arbitration system,
with access to independent experts.
29. It is too early to say yet whether this
will deliver a satisfactory avenue for lessees to resolve rent
disputes but it undoubtedly has the potential to do so. The PIRRS
Board comprises a number of lessee representatives and national
trade bodies to ensure that the scheme is truly impartial, independent
and addresses lessee needs. The surveyors who have responded initially
to provide services under the proposed scheme include a number
of familiar firms. All were asked to disclose conflicts of interest
by providing details of those pub owning companies they had worked
for in the last three years. Several failed to make the necessary
disclosures. This was highlighted to the BII by members of IPC
and for the time being the scheme has been withdrawn.
30. What is clear, however, is that the
PIRRS scheme will only provide dispute resolution in rent review
cases; it will not provide a mechanism for resolving general complaints
or grievances. The BESC report expressed concern that lessees
have few avenues of complaint if they believe that their pubco
is acting unfairly or, more pertinently, if the Code of Practice
is being breached. Arguably it is this absence of a general dispute
resolution mechanism which has fuelled letters to MPs from lessees
who have nowhere else to express their concerns.
31. Despite the BBPA's evidence to the Committee
that they would act as an "intermediary to resolve any misunderstandings"
in the Code of Practice, this has not addressed lessee's fundamental
concerns. The IPC has received many calls from lessees who feel
they have nowhere to turn when their pubco has acted unfairly
or where Codes of Practice are ignored or breached. The BBPA refer
them to the company concerned and has said it is not a matter
for it to address. The BII has begun to offer a service to consider
complaints, but there still is no independent mechanism for redress.
Lessees have little confidence in either organization and ultimately
it appears that neither can effectively moderate the behaviour
of the pub companies.
32. The establishment of a truly independent
statutory code with access for lessees to independent redress
along the lines recommended by the RICS, and indeed TISC in 2004,
remains the only solution to this conundrum. Properly addressed
and implemented the findings of the RICS in its recent report
are capable of providing the valuation framework and guidance
for RICS members such that the normal system of expert and arbitral
determination of rent reviews in the pub sector should work properly
and and in a way that would be expected in other commercial sectors.
OUTSTANDING ISSUES
OF CONCERN
33. The above three initiatives can be seen
as a partial response to elements of the BESC Report, but they
leave the substantive recommendations of that Report largely untouched.
In particular, they fail to even acknowledge the recommendation
that the use of product ties should be severely restricted and
that these agreements should be scrutinized by the competition
authorities. The assumption by pubcos appears to have been that
if sufficient progress is made on the other matters, then this
will assuage competition concerns about the tie and political
concerns about the treatment of tenants.
34. The view of the IPC is that these issues
are so fundamental to the nature of the relationship that they
cannot be simply offset in this way and must be separately considered.
Moreover, we would argue that the above proposals are not in and
of themselves sufficient to address even the individual recommendations
in those areas.
35. The following issues raised by the BESC
Report remain unaddressed by the above initiatives and remain
issues of concern to the IPC:
(a) Beer Tie: the Committee felt that
if the interests of pubcos and their lessees were aligned, then
the pubco would sell beer to the lessee at a price which enabled
them to remain competitive. The OFT conducted a partial analysis
of price, comparing the some aspects of the free trade with tied
lessees. This analysis failed to take account of the aggressive
prices charged by town centre outlets such as Wetherspoons and
others. Even so, it still found that consumers were at least 8p
a pint worse off buying in a tied pub. We would be happy to provide
additional figures to the Committee on the price differential
between tied and non-tied pubs. This reinforces the Committee's
conclusions and justifies its recommendation that the tying of
beer and other products should be severely limited
The Committee also suggested that the only way
to settle the argument about whether the Tie did confer benefits
to the tied tenant or not was to offer all lessees a choice of
being tied. This has been taken up by some smaller landlords,
but has been rejected by pubco representatives. We therefore have
to concur with the assessment that this will require Government
intervention and that DBIS should consult on how best to achieve
this
The Beer tie is not mentioned in the BBPA framework
Agreement or RICS Report. Political intervention is therefore
required to address this recommendation.
(b) AWP Tie: both the 2004 and 2008-09 inquiries
agreed that the pubcos did not add sufficient value to justify
their claims to 50% of machine takings and MPs were unconvinced
that the benefits of the machine tie should outweigh the income
foregone by the tenant. BESC recommended that the AWP tie be removed.
The BBPA Agreement simply requires companies
to make clear where the AWP income sits in the rental model. The
suggestion is that it be removed from the divisible balance but
that the tie remains in place. The tie allows pubcos to receive
royalty payments from preferred suppliers which results in higher
than market rents for tied tenants and an additional income stream
for the landlord. We agree with BESC and TISC that the tie should
be removed. Given that this has been a recommendation since 2004 but
no voluntary action has been taken to address it, again, political
intervention is required.
(c) Insurance: in response to BESC concerns
about the nature and cost of the insurance provision, the BBPA
has proposed that pubcos will price match insurance cover. This
is something of a smokescreen as it still forces lessees to go
through multiple hoops in order to save money on their insurance.
More importantly, the second aspect of the Recommendation in this
area is left unaddressed—namely that some insurance policies
require the lessee to pay for a benefit to the pubco, in particular
to cover them for loss of income from wet rent. We concur with
BESC in saying that pubcos should themselves pay to take out insurance
against the risks they face.
(d) UORR Clauses and RPI: the 2004 TISC
Report called for an end to the use of UORR clauses. Although
the pubcos have agreed that they will not enforce these clauses
and will interpret all lease provisions as providing for downward
as well as upward review, the fact remains that many thousands
of leases still contain these clauses, which could be enforced
in the courts if the landlord chose so to do. Should the property
change hands, the lessee has no comfort from a side letter which
is not binding on successors in title.
The same applies to RPI clauses. Coupled with
regular rent reviews, the use of an RPI clause results in an automated
rental accelerator where rent increases regardless of what is
happening to earnings. In many cases, RPI clauses have been imposed
upon lessees as a "price" for asking for a Code of Practice
rent review or for the removal of an UORR clause.
The continued refusal to remove these clauses
once and for all from lease agreements by means of a deed of variation
is puzzling but ultimately unacceptable. The BBPA code offers
the opportunity for lessees wanting their removal to change to
a new agreement and to bear the cost of doing so. There is no
guarantee that the new agreement will not be on worse terms. As
has already been noted, pubcos have in the past imposed punitive
lease terms as the "price" for a requested change.
IPC RECOMMENDATIONS
FOR ACTION
36. In summary, the IPC believes that the
steps taken by BBPA, RICS and BII are insufficient to address
the Committee's specific concerns about the rental valuation model,
the issuing of leases and dispute resolution. All of them require
additional strengthening to be considered an adequate and robust
response to the Committee's recommendations. In addition, the
substantive issues raised by the Committee in respect of product
ties and lease clauses remain outstanding.
37. What the TISC Report in 2004 teaches
us is that once the spotlight of public scrutiny has been removed,
then the threat of regulatory intervention weakens and there is
no imperative to act. Warm words and good intentions do not translate
into positive or lasting action; for example, we have recently
learnt that Enterprise Inn has removed its financial support from
distressed lessees, effective after the OFT inquiry reported.
38. The IPC therefore believes that the
Committee's overall conclusion that "the time has now come
for government to intervene to ensure a fair and legal framework"
remains valid and should be pursued as a matter of urgency.
39. We would propose the following series
of actions:
(a) The Government should, with immediate effect,
withdraw the Land Agreements Exclusion Order to subject pub agreements
to the full scrutiny of competition law. A consultation on this
subject was held earlier this Autumn and the IPC's submission
to it is attached
(b) The OFT inquiry failed to consider the competition
implications on business to business agreements and the Government
should either negotiate serious undertakings in lieu of a reference
on the following matters with the pubcos, or refer the matter
forthwith to the Competition Commission
(c) The Government should proceed as recommended
by the BESC Report to consult on means to offer all tied lessees
a choice of whether to be tied for beer or not. In addition, these
lessees should be afforded the opportunity to buy one guest beer—supplied
by small local brewers—outside of any tying arrangement.
This could form an undertaking in lieu of a reference and should
only apply to those companies with a market share of more than
1%—to avoid damaging the smaller regional brewers
(d) Where agreements contain a beer tie, all
other forms of tying for wines, spirits and minerals or ancillary
should be severely restricted and AWP ties should be abandoned
forthwith. This could form an undertaking in lieu of a reference
and should only apply to those companies with a market share of
more than 1% to avoid damaging the smaller regional brewers
(e) The Government should consult to extend the
terms of the Unfair Contract Terms Regulations to small businesses
(f) The use of UORR clauses should be outlawed.
There was a 2003-04 Government consultation on this subject which
set out such an approach but was abandoned following commitments
given at the TISC. It should be revisited as a matter of urgency.
Undertakings were previously given to your committee by at least
one pub owning company that this matter would be addressed by
way of the provision of deeds of variation to existing leases
and removal of the offending clauses from the draft templates
for new leases. This has not to our knowledge been carried out
or offered to tenants.
(g) TISC said that the Government should impose
a statutory code on the industry unless it took steps to "accept
and comply with an adequate voluntary code". The BESC report
noted that these recommendations had not solved the problems of
inequality in bargaining power and were inadequate. The BBPA has
failed to negotiate an adequate voluntary code and the system
of self-regulation has been shown to fail. TISC stated that "the
Government should not hesitate to impose a statutory code"
in these circumstances. We would suggest that this matter is reviewed
in the next Parliament and that a statutory code is imposed if
the RICS recommendation for an independent code with access to
independent redress is not implemented in full.
(h) The BESC Report highlighted the very low
returns many lessees are making from their business. At present,
the rental valuation model makes no provision for lessees time
spent in the day-to-day running of the business in the operating
costs. Whilst we accept that a full salary should not be included,
we nevertheless believe that there is scope for financial recognition
of the lessee's time within the model.
Notwithstanding all of the above actions to
be taken, we would strongly urge the Committee to commit to review
the situation in the next Parliament. There is clearly a range
of measures promised by BBPA, BII and RICS which are to be taken
forward on a voluntary basis rather than through government action;
but the lessons of TISC suggest that we cannot take those undertakings
at face value and it will be vital to maintain political oversight
and the pressure for action. A commitment to review and revisit,
in line with the TISC recommendation, would greatly assist in
that respect, but should be considered in addition to, rather
than as a substitute for legislative or regulatory intervention
19 November 2009
23 ALMR Benchmarking Survey 2009 Back
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